Negotiations can be tricky, but nuclear war isn't in anyone's interestsPhoto by Sharon Farmer

As the lockout rumbles on and negotiations show few signs of progress, we are all left to wonder how likely it is to cost us the 2012-2013 season. Most seem to believe that the season will start late and be shortened, as was the case for the 2011-2012 NBA season. Is that reasonable? To find out let's look at whether it's in the league's interest to lock the players out for the entire season if it means getting a better deal in negotiations.

Revenue Growth

A key component to all of this is revenue growth. Going by figures from Forbes and this article by James Mirtle these were the league revenues every season of the last CBA:

Season

Revenue (Billion US$)

Growth Rate (%)

2005-2006

2.267

2006-2007

2.436

7.45

2007-2008

2.747

12.77

2008-2009

2.819

2.62

2009-2010

2.929

3.9

2010-2011

3.09

5.5

2011-2012

3.28

6.15

Starting with the first season after the lockout, this gives us a compound annual growth rate of 6.35%. This is a slightly lower number than the 7.1% cited by James Mirtle. I think his number goes back to the season before the previous lockout and the difference could come down to using slightly different figures overall. Part of the difficulty here is that we don't have any official numbers to work with. This won't affect any of this analysis because I'll be looking at the different proposals and possibly sitting out a year with various possible growth rates.

Annual NHL revenue growth, which varied from over 12% in the 2007-2008 season to 2.6% in 2008-2009, was pretty similar to that of the other leagues over the same period:

Let's turn to how the growth rate affects the proposals and the league's incentives to lock out the players for the full season.

The Players' Proposal

James Mirtle covered the players' proposal quite well in an article worth linking twice. It's more complicated than the last CBA and the owners' offer, but here is a summary:

Year

Offer

2012-2013

$1.907B

2013-2014

$1.984B

2014-2015

$2.103B

2015-2016

$2.103B plus 54% of difference between 2015-2016 and 2014-2015 revenue

Comparing this deal to the owners, including the potential for canceling this season, isn't completely intuitive. Money the owners make now is more valuable than money they make a year or two down the road. Similarly, money earned a year from now is more valuable than money brought in three years from now. The main financial tool used to take this into account is net present value, NPV.

Going by the proposal above, I calculated the net present value of the owner's share of league revenues for various potential growth rates. These numbers represent the of their cut after player salaries are taken out. I also calculated the net present value of their share of league revenues with the same split as the previous CBA. Here are those numbers:

Growth Rate

NHLPA Offer (Billion US $ NPV)

Previous CBA

3.5

7.16

7.18

5

7.81

7.5

6.35

8.41

7.8

6.5

8.48

7.83

7.1

8.76

7.97

8

9.18

8.18

9.5

9.89

8.54

From this table we can see that unless league revenues grow at a very low rate the players' proposal is better for the owners than the status quo, substantially so for higher growth rates.

Owners' Proposal

The league's proposal is a lot more straightforward:

Year

Players' Share of Revenue

2012-2013

49%

2013-2014

48%

2014-2015

47%

2015-2016

47%

2016-2017

47%

2017-2018

47%

The league's offer is for six years, so let's drop a year off of it to get a fair comparison to the NHLPA offer and the previous CBA. Again, these numbers are league revenues net of total player salaries.

Growth Rate (%)

League Proposal

NHLPA

Old CBA

3.5

8.75

7.16

7.18

5

8.88

7.81

7.5

6.35

9.24

8.41

7.8

6.5

9.28

8.48

7.83

7.1

9.45

8.76

7.97

8

9.7

9.18

8.18

9.5

10.14

9.89

8.54

You can see what James Mirtle pointed out - the gap is large, but goes down the larger we assume revenue growth to be.

Worth Sitting Out a Year?

Let's now get to the question of how much the owners must gain in negotiations to make losing a season worthwhile. As a starting point, we'd like to compare the owners' share of revenues if they take the players' deal with what it would be sitting out a year and then getting their deal. Unfortunately, the offers have complicated this because the NHLPA offer is already one year shorter than the league's proposal; the hypothetical year off would make the players' offer two years longer. I deal with this in two ways: by adding two years to the NHLPA deal that look like the last two and by adding two years where the owners and players each split revenues 50/50, which would be more favorable to the owners. Here is a comparison of how the owners do, in net present value, sitting out a year and getting their offer and immediately taking the NHLPA offer with those tweaks:

Growth Rate (%)

Skip Season Then Owner Offer

NHLPA extended

NHLPA 50% last 2 years

Previous CBA

3.5

8.51

8.6

8.86

8.65

5

8.89

9.47

9.66

9.1

6.35

9.25

10.28

10.42

9.52

6.5

9.29

10.37

10.5

9.57

7.1

9.45

10.74

10.85

9.77

8

9.7

11.31

11.37

10.07

9.5

10.13

12.28

12.28

10.59

The takeway is that no matter what revenue growth is,the owners are financially better off taking the players' offer, or even the old CBA , than canceling the 2012-2013 season and getting everything they want out of negotiations.

It's worth noting that the above chart is optimistic for the owners in every scenario. Locking the players out for a full season will almost certainly not get them everything they are asking for now - if that were the case they'd probably be closer to a deal. If they don't lock the players out, this season will almost certainly be shortened which will cut into the 2012-2013 figures. Perhaps more important are sources of non-hockey-related revenue such as real estate and other investments based around the hockey venues. The return from these assets will plummet if they miss a season and they can't get any of those back from the players down the road. I suspect that if they cancel the season it would be even worse for the owners than the above table indicates.

It is not in the league's financial interest to cancel the 2012-2013 season.

I think the problem with your analysis is that it fails to account for the skewed distribution of league revenues. There may be enough teams who would benefit from a lost season to block a new CBA, even if getting a deal done is beneficial to league-wide revenues.

You are definitely right that I ignored possible effects of different interests within the group of owners, only considering the league as a whole. I don't think that has much impact on these results, but it certainly could if there are owners that actually lose money.

I think those splits would affect how long the lockout will go on because many owners may benefit from a shorter season. That kind of stuff is tough (impossible) to look at because we don't have any info on when teams make their money.

Is how revenue is split between teams an issue between the league and the NHLPA? i.e. Is it related to the definition of what league revenues are? If it's not, then the have-not teams of the league might be motivated to secure a bigger pie for the league before worrying about how big their slice will be. If it is, that could get real messy.

A nice look, but I think an element missing is the increased value of the franchises with lower player share of revenue. I could easily see the revenue differentials here could be swamped by teams being worth far more under a better deal. Most teams bump along at barely profitable or losing money and then the ownership recoups their money at sale on the increased value of the team.

I'm not sure I see why a more favorable deal would result in the team being worth far more.

Right now, the owners' proposal and players' proposal are about $700-800M apart over the next six years. So getting their way means about $25M more per team (over the six years) than taking the players' deal.

It seems like that would result in an immediate bump in franchise value of about $25M. The new owner in a prospective sale could now give $25M to the old owner that he would otherwise have given to the players, and it's the same net result to him. But I don't see why it'd be much more than a $25M bump.

I guess maybe it's nice to have the next round of negotiations start from a more favorable baseline -- maybe you hope to land in a slightly more favorable place in the next round too and recoup a bit more profit that way. But that seems like a minor benefit, not something worth tens of millions of dollars.

Good number crunching.
One factor you can't leave out, though, is the us-vs.-them mentality.
The owners are competitive too and this negotiation is their game. They are willing to squander some money to crush their opponent.

The owners want to pay the players as little as they can get by with, and the union is having none of it. Unfortunately, the players, after a lengthy lockout, will not have the clout to demand much because the players will have run out of money. And so the greedy owners will have won again because in the end, they have the power because they have the money. The real losers, as usual, are the fans who put the money into the owners and players' pockets. The ONLY way to put an end to the nonsense is to refuse to watch hockey. And that is never going to happen, is it?

Im not sure Amy. The last lockout did some peripheral damage to the league, but it came back with new rules, a new promise of improved parity, etc. so the league could market what was actually a better game to a fan base that was mostly on the side of the owners in the prior fight. So the fans came back.

This time around, I think the NHL is in real danger of doing substantial damage to its client base. Teams in mega-markets probably don't have to worry, but clubs fighting to keep and expand their fanbases will have to deal with real resentment and apathy in their markets this time around I suspect.

Why can't they do a 50-50 split? The owners
take the financial risk but the players
supply the product. Neither could do it
without the other party. This may sound
simplistic but this is what it boils down to.
Bill.

Sure, but the $700-800 million difference even swamps all the scenarios up to a 6.35% growth rate.

Plus, most sales of businesses are based on forward looking multipliers of revenue and/or income that may make the difference exceed just the $25 million, over 5 years, but I can't say by how much. Not to mention that the effect would also vary by teams depending on how those benefits flow to different teams.

THE OWNERS AND THE PLAYERS SHOULD BE
A PARTNERSHIP IN CO-OPERATION.
THIS CONFRONTATIONAL POSTURING IS THE WORK
OF GARY BETTMAN. IT'S DIFFICULT TO GET WORKED UP OVER THE CANCELLATION OF THE REGULAR SEASON.. WHEN ALL WE HAVE TO LOOK FORWARD TO IS THE GROSSLY INEPT TORONTO MAPLE LEAFS.(THE RICHEST FRANCHISE IN SPORTS) IS THIS THEIR IDEA OF A GOOD PRODUCT?
Re LOCKOUT: I LIKE THEIR REASONS.. "WE'RE DOING THIS FOR THE FANS". EXCUSE ME.. SAY THAT AGAIN.

What about costs? Your entire premise seems to be based on assuming that costs do not drop in a lockout year. On the players side, you can basically equate their revenues to profits, but on the owners side you cannot. Some teams that were losing money prior to the lockout may actually have a better profit position in a lockout year than they do in a year of regular season play.

What about costs? Your entire premise seems to be based on assuming that costs do not drop in a lockout year. On the players side, you can basically equate their revenues to profits, but on the owners side you cannot. Some teams that were losing money prior to the lockout may actually have a better profit position in a lockout year than they do in a year of regular season play.

Thanks for the comment.

I did assume costs would drop in a lockout year. The tables represent revenues after player salaries are paid. For a lockout year that's zero - both the revenue and salaries are assumed to drop to zero.

Your comment really points to the bigger issue of different teams having different stakes. My analysis was for the league as a whole, with cost of player labor aggregated. I don't know what Bettman's mission is, but it's probably pretty close to maximizing the sum of league profit, which would make my work not too far off. If he has to consider specifics of individual teams, whether they are the Leafs or Coyotes, that could change things.